Current Global Commodity Price Trends and Future Prospects
CEIC Data News @lert: The share of primary commodities in the distribution of global output and trade have been declining over the past century. Nonetheless, fluctuations in commodity prices continue to significantly affect global economic activity. For many countries—especially developing countries—commodity price movements have a major influence on overall macroeconomic performance, on account of their large impacts on real output, as well as on the balance of payments, and on government budgetary positions. For industrial nations also, commodity prices play a non-trivial role in transmitting business cycle disturbances and in affecting inflation rates.
From 2003 to early 2008, the world stood witness to the most striking commodity price boom of the past century. The price of oil, metals, foodstuffs, grains, and other commodities rose sharply, over a sustained period. Not too differently from earlier commodity booms, this one too was associated with strong global growth, but was exceptional in its duration and in the range of commodities that was affected.
Commodity Prices are Expected to Develop Along a Shaper Uptrend,
in Comparison to 2010
Chart provided by: CEIC Data
Typically, commodity booms come to an end as global economic growth slows. The reason why this particular one lasted as long as it did was principally because thanks to favourable demand conditions, developing countries continued to grow rapidly, even in the face of fast rising commodity prices.
As the pick-up in global demand becomes increasingly more discernable, this year commodity prices are expected to develop along a sharper uptrend, in comparison to 2010.
Still, in today’s highly volatile global economic environment, where already existing uncertainties as well as risks from supply and demand volatility, are compounded by speculative flows which are notoriously difficult to forecast with any degree of accuracy. As a result, forecasting commodity prices has become a much more challenging task, compared to not so long ago. This said, even with such volatility, one can distinguish a number of common trends and patterns[1] which might be summarized up as follows:
- With the increase in economic and political uncertainties and associated risks that have been in evidence since the second half of the last decade, commodity-intensive emerging market economies have assumed a new instrumental role as drivers of economic growth.
- Compared to the customary relationship between economic growth and the growth in the demand for commodities, that was witnessed in previous years; at the present juncture of the business cycle, this time round the growth in commodity demand has been comparatively stronger.
- Yet, the response of supply, to this stronger-than-expected demand, has been relatively more muted, than had been the case in past instances.
- On the other hand, the effect of supply shocks related to natural phenomena (e.g. draughts, severe floods, tsunamis and such like) has increased in importance, as have the number of such occurrences within a given time span.
- As international commodity prices are denominated predominantly in the U.S. Dollar— which has tended to depreciate steadily over recent months—such prices have been developing along an uptrend and tended to be less stable, depending on the fortunes of the U.S. Dollar.
- An expanding supply of money that mirrors a slack monetary policy and an associated decline in interest rates, has kept the costs of financing commodity inventories, low.
- With the ongoing securitization of commodity markets, securitized commodity assets have been developing along a steadily rising trend and the net amounts of commodity index swaps and commodity-based derivative instruments have been quite sizeable.
All of the trends and patterns enumerated above have introduced new risks and uncertainties to world commodity markets and—to the extent that commodities have been increasingly transformed into tradable securities and assumed identities that are independent of the underlying securities—have contributed firstly to creating an evident uptrend in commodity prices. Secondly they have added new elements of risk and uncertainty to the functioning of markets and of the economy at large.
Nonetheless, elements of risk stemming mostly from supply-related factors and from exchange rate risks have not proven sufficient to slow down the uptrend in commodity prices that has been in evidence since the second quarter of 2009.
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This article is written by Dr. Ahmet N. Imre, a freelance economic analyst at ISI Turkey. He formerly worked as a chief economist at Black Sea Trade & Development Bank.
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